Rosemary Follett’s fiscal frolic last week (jun12-jun 19) brought a predictable round of squeals from those hit hardest, in this case land owners.
Ms Follett could have raised some of the amount $13 million a year in a very similar way and not received the same squeals. She could have re-introduced death duties. Then those taxed could not squeal.
Oh no, not death duties. All the think tanks have praised John Bjelke-Petersen for abolishing death duties in the 1970s, setting off a “”competitive” chain of death-duty abolition among all the states.
Come to live in sunny Queensland, where you can die without being taxed, was the cry. And the other states followed suit. It was one of the dumbest, most iniquitous tax changes in Australian history far dumber and iniquitous than any GST.
By not having death duties, the states have had to increase other taxes and charges to make up. Last week’s mini-budget was a classic example. The ACT Government chose the easy targets: rates and land taxes.
The states’ narrow tax base has meant they have had to introduce higher taxes in narrow fields, which can be very distorting. Payroll tax is a good example. Another example is the way the states rely heavily on stamp duty. The duty is never properly adjusted for inflation and property value increases cause by population growth. The result is an every-growing take for the state.
Tiny ex-govvie boxes are attracting duty rates designed in the 1970s for yuppies buying mansions. And the ACT is one of the worst jurisdictions.
The Industry Commission has pointed out that the high duties mean people are less inclined to move. The Government imposes a moving tax of about $3000 or $4000. So couples whose children have fled stay over-sized houses. It is generally inefficient and drains on the wealth of all, especially with aged discounts on the electricity that heats the over-sized houses.
The Constitution prohibits the state from raising sales taxes (except through some artful licensing schemes on tobacco, alcohol and petrol). And the Constitution plus the Federal Government’s determination have also ruled the states out of income tax.
And then the states were silly enough to rule themselves out of death duties. Incidentally, I am indebted to Julie Smith’s Taxing Popularity: the Story of Taxation in Aus
tralia published by the Federalism Research Centre for the more reasonable parts of this argument. The whackier parts and their ACT application are my own. I commend the book, available throug
h Anutech, to anyone seriously interested in taxation issues. Smith argues that the capital-gains tax reform of 1985 was not as powerful as it should have been because without death duties or at least assessment of capital gains tax at death rather than only at sale, “”mere mortals continue to avoid tax by dying before selling and keeping their
wealth in the family”. Well, if the Federal Government is unwilling to impose a capital-gains tax at the time of death, the opportunity is there for ACT. The ACT, unfortunately, has the lowest standardised death rate in Australia, at 6.1 per 1000
We have about 1800 deaths a year in the ACT. Only 800 of those would be taxable deaths, however. Many of the 1800 would have few assets or be spouses inheriting only the family home in which the Government would sensibly have an exemption. There’s no point taxing widows to the extent
that they become a drain on the state. The 800 at, say, and average of $5000 each would yield the Government about $4 million.
There are difficulties. Some oldies would flee to tax-free Queensland to die. Let them go; older people tend to be a drain on the public purse anyway. Those with families here, who are incidentally less likely to be a drain on the state, will be more likely to stay.
No doubt a death duty would attract an avoidance industry, but you can close a significant number of loopholes. Death duties are a much fairer, and less painful, method of tax than jacking up the rates all the time or increasing bus fares. Let’s face, oldies would prefer to defer their tax until they are dead than have to pay it (in the form of rates and charges) when they are struggling to make ends meet.
Surviving partners, of course, should be exempt for some reasonable indexed amount, say, $1 million.
Once the ACT imposed death duties, other states might follow suit, just as they followed suit when Queensland abolished them. The subsequent history of state finances show that abolition of death duties was not such a good idea. States have had to get the money from other less equitable and less efficient sources.
Land tax, for example, just gets passed on to tenants or to consumers in the case of businesses. And in any event is a shift of tax collection from Federal to state level as landlords claim the state tax as a deduction on the federal tax. Payroll tax inhibits employment.
Everyone likes the Government to spend money on them; but they hate the taxes. To reimpose death duties would be “”a courageous decision”. The trouble is as the Federal election showed, voters react only to the down side of a tax change. Perhaps the ACT’s more intelligent electorate can listen to the logic and equity of the other side of the argument.
Smith very cogently points out that Australian tax policy is a national self-delusion. We imagine the tax system is concerned with equity, efficiency and simplicity. In fact, since federation there have been huge shifts of the burden to middle- and low-income earners; taxes are impos
ed too highly on productive activity (payroll taxes) and often not at all on unproductive activity (investment in the family home); and they are administratively clumsy. Of course, there is another side to the argument expenditure. Government spending as a per centage of GDP has steadily increased from about 15 per cent in 1938-39 to 32 per cent now.
In the ACT’s case, the idiotic bus service drains about a half to three-quarters of our rates revenue while empty buses loom around the suburbs taking nobody anywhere except along Athllon Drive at peak hour, but that’s another story.